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July 8, 2011

South Korean Olympics Offer Opportunity for Investors

IndexIQ identifies sectors that stand to benefit from 2018 Winter Games

In the wake of Wednesday’s news that Pyeongchang, South Korea has been awarded the 2018 Winter Olympics, IndexIQ, which develops index-based liquid alternative investments, on Thursday presented reasons for investors to watch several sectors for potential growth in the South Korean economy.

According to a New York Times report, this is the first time that South Korea will host the winter games, and it won overwhelmingly on the first ballot after 10 years of trying. The country’s pitch, to expand winter sports access within the burgeoning Asian market, was a winner.

Its budget for 2018, too, was considerably larger than the bids of Munich, Germany, and Annecy, France—$1.5 billion for the games themselves, and another $2 to $6 billion for infrastructure projects. Pyeongchang’s intent is to become a regional winter sports hub.

In IndexIQ’s view, several of the sectors represented in its IQ South Korea Small Cap ETF (SKOR) appear poised to benefit from this news, including:

industrials (33.47% of the fund)

Consumer discretionary (15.97%)

Technology (14.58%)

Materials (13.27%).

According to IndexIQ, small-cap businesses in South Korea should benefit disproportionately from the increased demand in with tourism, trade, travel, hospitality, and the infrastructure projects that will be undertaken. The company has prepared a detailed fact sheet on SKOR, which can be found on its website.

Adam Patti (left), IndexIQ’s CEO, said that for investors the major benefit of South Korean investment as the country gears up for the winter games is not through large caps, which generally are multinational companies making most of their money outside the country. Instead, he says, small caps will be the ones to provide financing, construction, and other growth.

“If you buy a large-cap ETF, such as the iShares product, you’re buying large-cap multinationals that get all their revenue outside of South Korea,” he says. “For example, Samsung gets 50% of its revenue from the U.S. and 50% from China. Small caps are closer to the consumer, and smaller companies are the engine of the home economy and the ones that will be benefiting from increased domestic expenditures and increased tourism for these games.”

South Korea, he adds, “has been doing fantastically all year anyway. The Winter Olympics is terrific for them, for a lot of reasons beyond the games. The best way to play it is small-cap stocks. South Korea is up 16% YTD as it is, and Asia is out of favor. Korea is booming. This is a play on the domestic economy.” For South Korean exposure, he reiterates, small caps are appropriate; large caps “are tied to large economies outside South Korea.”

Investors will be watching as the country gears up for the influx of winter sports enthusiasts. South Korea had finished second to Vancouver in the vote to host the 2010 winter games, and also to Sochi, Russia, for the 2014 games. Now that the games will come back to Asia, there is the promise of a new market for winter sports.

In a statement, Andrew Judelson, the chief revenue and marketing officer for the U.S. Ski and Snowboard Association, said, “The Olympics will benefit from returning to Asia and especially Korea, which has become a major global business center.”

Park Yong-sung, who is the head of the South Korean Olympic Committee, said Pyeongchang’s victory “gave new hope for those developing countries, because in the past we think the Olympics are only for the rich and big countries.”